2018 (5) TMI 352 - AT - Income Tax

Disallowance of commission expenses u/s 40A(2)(b) - related party payments - reasonable percentage of commission that can be treated as genuine business expenses - as per AO fair market value of the services as required u/s.40A(2)(b) for computing the disallowance - Held that - We note that the assessee has paid commission to the Daga Life Sciences DMCC, Dubai, which is controlled and managed by brother in law of the Managing Director of the assessee company. The nature of relationship between the assessee company and the payee and a very short contract for agreement of commission and lack of necessary details of rate of commission, the authorities below have concluded that the excessive commission payment was not justified. A.O. has held that 1% commission was justified. CIT(A) has held that 2.5% commission was justified. Such subjective decision of the authorities below is not correct.In this regard, the assessee s submission that the authorities below cannot sit in judgment on the length of the contract, is sustainable. Since on the basis of the same contract, earlier assessments were completed. However, it is certainly necessary to examine whether the payments are in accordance with the contract. The actual commission paid if the same is in accordance with the terms of the contract has to be allowed. However, in the present case, it is not established that the rate of commission paid is as per the contract. The main contract shows a range of commission and it mentions that the individual rates will be fixed as per the mutual consent. No detail whatsoever as to how the mutual consent have been arrived at for a particular rate in a particular invoice has been submitted before the authorities below. In the absence of necessary details, adverse inference drawn cannot be said to be devoid of cogency. Thus the interest of justice will be served if the issue is remitted to the file of the A.O. The A.O. is directed to examine the documents by which the mutual consent was arrived at for individual invoices of commission. Disallowance of commission expenditure u/s.40(a)(i) - Assessee submitted that the agent has no business connection in India and the commission paid for the services rendered by the foreign agent outside India and further as per India- UAE treaty, foreign Agent has no permanent establishment - Held that - The assessee has not provided the details, rather it has been contended that the Assessing Officer has not called for communication between the assessee and the agent as emanating out of the ground raised before the CIT(A). The position taken by the AO and the assessee are contradictory. In our considered opinion, the interest of justice will be served if the issue is remitted to the file of the AO. AO shall examine the correspondence between the assessee and the Agent and thereafter decide the issue regarding the nature of the services rendered. Furthermore, the claim that the payee is a resident of UAE also needs to be established by reference to the relevant documents, regulations and treaty. Needless to add, the assessee should be granted adequate opportunity of being heard. Disallowance of service tax - Held that- This ground is not emanating out of the orders of the authorities below. However, since we have already remitted the issue of examination of commission paid to the file of the Assessing Officer, the Assessing Officer shall examine this issue also. Furthermore, it is noted here that the said service tax has been paid by the assessee on the services rendered by the Dubai based agent. Firstly, how can the service tax arises when the services has been rendered outside India and secondly, under what limb of contract the assessee was to incur the said expenses instead of the agent, also needs to be examined. Allowing of carry forward of long term capital loss - Held that - Here as clearly brought out by the Assessing Officer, the loss has not been incurred on any transfer of capital asset; hence, there is no question of any long term capital loss arising to be carried forward. Furthermore, the wholly own subsidiary of the assessee was the investment in the capital field and hence there is no provision in Income Tax law regarding the carry forward of losses in capital field. Hence, we set aside the order of the ld. CIT(A) and restore that of the Assessing Officer.

Summary

Issues Involved:

1. Disallowance of commission expenses under Section 40A(2).
2. Disallowance of commission expenses under Section 40(a)(i).
3. Disallowance of service tax.
4. Allowing of carry forward of long-term capital loss.

Issue-wise Detailed Analysis:

1. Disallowance of Commission Expenses under Section 40A(2):

The assessee challenged the disallowance of ?6,67,03,097/- paid as commission to Daga Life Sciences DMCC, Dubai, arguing that DLS is not a related party as per Section 40A(2)(b) and that the expenses were reasonable. The CIT(A) upheld the AO's view that DLS Dubai is a related party due to the family relationship between the directors of the assessee and DLS. The CIT(A) also noted that the commission rate of 22.78% was excessive compared to the RBI's ceiling of 12.5%. The CIT(A) allowed a commission rate of 3% instead of 1% as determined by the AO. The Tribunal remitted the issue back to the AO to examine the documents establishing mutual consent for individual invoices and to allow the commission if it aligns with the contract.

2. Disallowance of Commission Expenses under Section 40(a)(i):

The AO disallowed ?7,38,05,757/- for non-deduction of TDS, arguing that the commission income arose in India and the agent had a business connection in India. The CIT(A) agreed, noting that the contract was executed in India and the assessee paid service tax on the commission. The Tribunal remitted the issue back to the AO to examine the correspondence between the assessee and the agent and to determine the nature of services rendered, considering the relevant documents, regulations, and treaties.

3. Disallowance of Service Tax:

The assessee contended that the CIT(A) wrongly disallowed service tax paid on the commission. The Tribunal noted that the issue was not clearly addressed by the authorities below. Since the main issue of commission payment was remitted back, the Tribunal directed the AO to also examine the disallowance of service tax, considering the nature of services and the contractual obligations.

4. Allowing of Carry Forward of Long-term Capital Loss:

The AO rejected the assessee's claim of long-term capital loss of ?84,46,013/- on the write-off of investment in a wholly-owned subsidiary in China, as there was no transfer of a capital asset. The CIT(A) allowed the carry forward of the loss, but the Tribunal disagreed, stating that the loss did not arise from a transfer of a capital asset as per Section 48. The Tribunal set aside the CIT(A)'s order and restored the AO's decision, emphasizing that there is no provision for carrying forward losses in the capital field without a transfer of a capital asset.

Conclusion:

The Tribunal remitted the issues related to the commission expenses and service tax back to the AO for further examination and upheld the AO's decision on the non-allowance of carry forward of long-term capital loss. The appeals by both the assessee and the Revenue were allowed for statistical purposes.